Making tax digital was a bold aspiration set out by the Government in last year’s budget. The vision is to make the tax system for businesses operate much more closely to “real time”, as opposed to the current system of reporting information on tax returns and paying liabilities long after the end of the tax year. In this blog I will explore how this might be implemented within rural businesses from what we know so far. The Government’s consultation findings won’t be reported on until early 2017.
From 2018, the proposal is that most businesses, self employed and landlords will be required to keep track of their affairs digitally and update HMRC at least quarterly via their digital tax account. Businesses will be required to use digital tools, such as software or apps to keep records of their income and expenditure. These measures will not apply to individuals in employment or pensioners unless they have secondary income of more than £10,000 per annum from self employment or property. A consultation period has been running throughout 2016, and to say the proposals have been controversial would be an understatement. The consultation suggests that making tax digital will help to reduce the tax gap and contribute £945m to the exchequer by 2020/21.
As the pace of technology continues to develop and become part of every day life I think it is right to pursue a digital agenda. Paper is disappearing, more businesses are transacting online, and there has been a significant reduction in the use of cash in the economy due to the rise of smart and contactless payment methods. Once the digital tax regime has bedded down we will wonder how we coped under the old system. But a change to our tax system of the magnitude proposed should not be compressed into an arbitrary timetable. There are so many things that have to be put in place, not to mention the poor internet connection speeds and lack of broadband infrastructure in rural areas.
There is a feeling it’s a one size fits all approach, the scope covering businesses with many millions of turnover to businesses with profits below the tax threshold. For rural businesses quarterly digital updates do not line up well with the overall objectives of cost savings and certainty around tax liabilities. The seasonal nature of farming means that quarterly updates are unlikely to provide meaningful business management information or figures from which a tax liability can be accurately estimated. Estates and some family businesses can have complex ownership structures and very diverse activities. It would be difficult and expensive to fit such an economic unit or individual entities into a quarterly reporting framework.
Looking more widely at rural businesses, many individuals are self employed as rural employment opportunities are more limited, and some are essentially lifestyle businesses. It has been challenged throughout the consultation process if a digital solution is appropriate in these cases, and whilst I have no doubt digital will be the destination, perhaps a more phased and proportionate implementation would provide a better long term result. Any transition to a new system takes time, and in order to gather high quality data in the scale being suggested requires a sensible timetable to ensure it’s achieved.
HMRC have already confirmed data will be transmitted via a secure, encrypted system, with businesses and individuals requiring to build in further measures to keep data secure going forward. The consultation period closed on 7 November, and we must wait until after Christmas to hear the outcomes from the consultation process and governments final plans. More updates to follow….
If you want to discuss any of the points raised in this blog please get in touch with me here, or:
01738 441 888
The information in this blog should not be regarded as financial advice. This is based on our understanding in December 2016. Laws and tax rules may change in the future.